First Look

Abstract—This paper shows that the network of relationships between brokers and institutional investors shapes information diffusion in the stock market. We exploit trade-level data to show that central brokers gather information by executing informed trades, which is then leaked to their best clients. We show that after large informed trades, a significantly higher volume of other institutional investors execute similar trades through the same broker, allowing them to capture returns that are twice as large as their normal trading performance. Similarly, we show that the clients of the broker employed by activist investors to execute their trades tend to buy the same stocks just before the filing of the 13D. Informed traders find it profitable to concentrate their trades with a leaking broker because the loss due to the information leakage is more than compensated by the gains derived from trading on the information generated by the other clients of the broker.

Publisher's link: https://www.hbs.edu/faculty/Pages/item.aspx?num=54672

Abstract—Researchers have struggled to establish a causal relationship between diversity and financial performance—especially at large companies, where decision rights and incentives can be murky, and the effects of any given choice can be tough to pin down. So the authors chose a “lab rat” with fewer barriers to understanding—the venture capital industry. VC firms are fairly flat: Every investor is a decision maker, and choices have clear business consequences. Using publicly available information, researchers can see how similar or different decision makers are and compare decision quality on the basis of investments’ performance. After examining tens of thousands of VC investments, Gompers has found that diversity significantly improves financial performance on measures such as profitable investments at the individual portfolio-company level and overall fund returns. And even though associating with similar people can have social benefits for those people, it can lead investors and firms to leave a lot of money on the table. In this article Gompers and Kovvali describe the research and provide recommendations for reaping the business benefits of diversity.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=54692

Abstract—New technologies can be unsettling for industry incumbents, regulators, and consumers, because norms and institutions for dealing with them don’t yet exist. Interestingly, businesspeople in emerging economies face similar challenges: The rules are unclear and infrastructure is lacking. In this article, the author suggests that tech pioneers would do well to heed a lesson he’s gleaned from his research in the developing world: For long-term success, companies must invest in the surrounding ecosystem. The author presents examples of entrepreneurs who have done just that in China, Bangladesh, Africa, and Chile, benefiting the public as well as their own enterprises. He then describes how an Indian health care organization is tackling institutional voids as it expands into medical tourism in the Cayman Islands. An in-depth look at the nascent drone industry follows, with profiles of companies that are helping create the conditions for the industry’s growth by amassing knowledge about best practices, influencing the development of regulations, exploring new uses for drones, developing a professional workforce, and so forth. The argument is that when firms launching innovative products or services look beyond their self-interest and work to collectively build the institutional infrastructure, they—and society as a whole—are more likely to prosper.

Publisher's link: https://www.hbs.edu/faculty/Pages/item.aspx?num=54693

Abstract—In 2006 Harvard Business School’s Michael E. Porter and Nitin Nohria launched a study tracking how large companies’ CEOs spent their time, 24/7, for 13 weeks: where they were, with whom, what they did, and what they were focusing on. To date, Porter and Nohria have gathered 60,000 hours' worth of data on 27 executives, interviewing them—and hundreds of other CEOs—about their schedules. This article presents the findings, offering insights not only into best time-management practices but into the CEO’s role itself. CEOs need to learn to simultaneously manage the seemingly contradictory dualities of the job: integrating direct decision-making with indirect levers like strategy and culture, balancing internal and external constituencies, proactively pursuing an agenda while reacting to unfolding events, exercising leverage while being mindful of constraints, focusing on the tangible impact of actions while recognizing their symbolic significance and combining formal power with legitimacy.

Publisher's link: https://www.hbs.edu/faculty/Pages/item.aspx?num=54691

Abstract—We explore how cognitive constraints can impede the effective processing and interpretation of less salient, non-quantitative (soft) information in private lending. Taking advantage of the internal reporting system of a large federal credit union, we delineate four important constraints likely to affect the lending process: (1) limited attention (or distraction), (2) task-specific human capital, (3) peer perception, and (4) learning over the credit cycle. Specifically, we find that utilizing soft information in lending decisions leads to worse credit outcomes when loan officers are busy or before weekends and national holidays; when loan officers had earlier non-banking and, in particular, sales-related experience; when both officers and borrowers are men, and when loan officers are members of informal organizational networks; and during periods of credit expansion. Overall, we provide novel evidence of non-agency related costs in the use of soft information in credit decisions.

Download working paper: https://www.hbs.edu/faculty/Pages/item.aspx?num=54618

Abstract—Why do some entrepreneurs thrive while others fail? We explore whether the advice entrepreneurs receive about people management influences their firm’s performance. We conducted a randomized field experiment in India with 100 high-growth technology firms whose founders received in-person advice from other entrepreneurs who varied in their managerial style. We find that entrepreneurs who received advice from peers with an active approach to managing people—instituting regular meetings, setting goals consistently, and providing frequent feedback to employees—grew 28% larger and were 10 percentage points less likely to fail than those who got advice from peers with a passive people-management approach two years after our intervention. Entrepreneurs with MBAs or accelerator experience did not respond to this intervention, suggesting that formal training can limit the spread of peer advice.

Download working paper: https://www.hbs.edu/faculty/Pages/item.aspx?num=52649

Abstract—This paper exploits a natural experiment in the entry of new lab managers across India’s 42 public R&D labs between 1995 and 2006 to study the complementarity between lab managers and incentive schemes. While scientists were provided with stronger incentives to patent and license from multinational companies in 1994, the “old generation” of lab managers disagreed with these aims and failed to adequately support scientists’ efforts. First, we show that the introduction of new lab managers aligned with the national R&D reforms is associated with a 58% rise in patenting and 75% rise in licensing revenues from multinationals. Second, using additional information on each scientist in these labs, we examine how their research productivity changed in response to different managers. Notably, we find that the entry of new lab managers is associated with improved research productivity: 15.6% higher h-indices, 11.7% more coauthors, 12.7% more research articles, and 25.1% more citations per scientist. Moreover, using natural language processing (NLP) techniques on the set of research abstracts produced among these scientists, we find that overall mood and sentiment increased by 9.4% following the first managerial change. Our results highlight the important complementarities between incentives and management practices, especially in developing countries. A back-of-the-envelope calculation that suggests India could save on 9–24% of its R&D and related subsidy expenditures under the entry of new generation lab managers.

Download working paper: https://www.hbs.edu/faculty/Pages/item.aspx?num=46697

Abstract—Even as the demand for managerial skills continues to grow, executive education worldwide has entered a period of disruption caused by the digitalization of content, connectivity, and communication. The current offerings of many executive education program providers fall short of creating new skills in executives and developing fresh capabilities for organizations. Based on a study of all the programs offered by the business schools, consultancies, corporate universities, and online education providers, we analyze the advantages, and the constraints, of the existing programs. We also map the vehicles for skill development—such as case discussions, lectures, simulations, coaching sessions, live projects, etc.—in terms of their potential to develop executives for the future. We then examine the impact of the forces of digital disruption—the disaggregation and disintermediation of activity chains and the decoupling of the sources of value in education programs—on the future of executive education.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=54353

Abstract—Executive development programs have entered a period of disruption catalyzed by the digitalization of content, connectivity, and communication and are driven by renewed demand for high-level executive and managerial skills. Unlike other segments of higher education, the executive education market is heavily subsidized by the organizations employing the executives that participate in them. To understand the ongoing transformation of the industry, we use a large database of interviews with participants in executive development programs at HBS—and executives in their sponsoring organizations—to map out the (multidimensional) objective functions of executive participants and their organizations and show how the trio of disruptive forces (disintermediation, disaggregation, and decoupling) that have figured prominently in other industries disrupted by digitalization (media, travel, publishing) are likely to reshape the structure of demand for executive development.

Download working paper: https://www.hbs.edu/faculty/Pages/item.aspx?num=51662

Abstract—Online retail accounts for a rapidly growing proportion of revenues in many industries. While selling online broadens firms’ access to consumers, operating margins are often lower in online stores than in physical stores. There are well-recognized reasons for this discrepancy: prices are easy to compare online, discount coupons and codes have high uptake, and sellers often bear the cost of shipping products to buyers. In addition to these factors, online selling precludes many methods of price discrimination exercised in offline environments. Many online stores present few barriers to accessing discounted products. We propose that deliberately increasing search frictions by placing obstacles to locating discounted items can improve online retailers’ margins and increase conversion. We demonstrate using a simple theoretical framework that inducing consumers to inspect higher-priced items first can simultaneously increase the average selling price and the overall purchase rate. We test these predictions in a series of field experiments conducted with an online fashion and apparel retailer. Using information from historical transaction data about each existing consumer, we demonstrate that price-sensitive shoppers are more likely to incur search costs in order to locate discounted items. Our results show that adding search frictions can be used as a self-selecting price discrimination tool to match high discounts with price-sensitive consumers and full-priced offerings with price-insensitive consumers.

Download working paper: https://www.hbs.edu/faculty/Pages/item.aspx?num=52177

Abstract—Prices in a wide variety of contexts are often presented in three parts: an original or suggested list price, a discount off that price, and the final selling price. Limited empirical evidence is available that speaks to the relative impact of each component on purchase behavior, even as theories abound. Measuring these impacts is critically important to sellers, to consumers, and to regulators who are keen on enforcing deceptive advertising guidelines against “fictitious pricing”—the practice of quoting list prices that do not truthfully reflect prior selling prices. This paper uses a large retail transaction data set that features wide variations in these pricing components within a relatively homogeneous product space. The data set has the unique feature of containing sales records from outlet stores wherein a subset of products have verifiably fictitious list prices and discounts, allowing for measurement of their impact on purchase incidence in actual retail settings. By measuring the impact of different pricing components on purchase likelihood, we find that list prices have a strong influence on purchase outcomes, with a $1 increase in the list price having the same positive effect on purchase likelihood on average as a $0.77 decrease in the actual selling price. This effect is larger for fake list prices but smaller in longer-lived stores and stores closer to regular retail channels. In a complementary laboratory experiment, we find that fake list prices have no impact on purchase intent when consumers have full knowledge of the true original price. These results imply that fake prices enhance demand by misleading consumers about true original prices.

Download working paper: https://www.hbs.edu/faculty/Pages/item.aspx?num=50777

No abstract available.

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The sudden departure to Hewlett-Packard of a top-level EMC Corporation executive who had full knowledge of EMC’s operations, business plans, and key personnel ignited a bi-coastal battle between two fierce rivals that was played out in courts competing for jurisdiction and states with diametrically opposed laws and public policies concerning non-competition agreements. The enforceability of the employment contract at the core of the case is explored in the context of motion pleading and preliminary relief, and litigation strategy is presented as part of a company’s overall business strategy.

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Supplements the (A) case.

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In summer of 2010, Murat Çavuşoğlu (HBS MBA 1994) led private equity firm Actera Group’s investment in Mars Cinema Group (Mars), the leading movie exhibitor in Turkey. Immediately after acquiring Mars and merging it with the second largest player in the market, AFM, Çavuşoğlu focused on institutionalizing and implementing value creation work streams in Mars. While transforming an entrepreneurial company into an institutionalized firm, Çavuşoğlu established adjacent businesses such as movie advertising and ticket sales. The most recent step in transforming Mars was to establish a movie distribution arm, which would help the company to monitor and manage the seasonal cycles, enhance the appeal for investors in the exit, and improve the valuation. However, while Çavuşoğlu was laying out the plans for his next move with movie distribution in 2014, Turkey’s Council of State, the highest administrative court in the country, had decided to cancel the approval for the merger of Mars and AFM, putting all of Actera’s efforts on Mars at risk. Should Çavuşoğlu push the stop button for distribution? If Çavuşoğlu decided to move forward with distribution, should he do it now or wait until the process with Turkey’s judiciary and regulatory authorities cleared out?

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Supplements the (A) case.

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Back to the Roots is a startup with a social mission to “undo food”—to reconnect people to where their food comes from. In late 2017, they are contemplating their next move. Back to the Roots has an eclectic portfolio of products, including ready-to-grow (e.g., gardens in a can) and ready-to-eat (e.g., cereal) products, and they are being courted by two major players in each category. With an award-winning snack bar in their hands, they are now debating whether they should delve further in to the ready-to-eat category. It is a competitive space and they wonder if they are ready to launch yet another new product and, if so, what this move would mean for their ready-to-grow product line.

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The so-called “infrastructure finance gap” was a problem in Nigeria as in many parts of the world. Infrastructure projects like power plants and dams were very large capital investments that could generate long-term consistent cash flows, but their financing and delivery involved multiple risks and uncertainties. If funds for infrastructure development came from traditional international sources like the World Bank or African Development Bank, those lenders would worry about foreign exchange, interest rates, and political risk and would almost always seek sovereign guarantees (payment guarantees from the federal government). Such assurances and guarantees were hard to come by, difficult to negotiate, and project inception could take decades. In this context could pension funds or private equity-type structures be viable alternative sources of financing for infrastructure? By 2017 Nigeria had reformed its pension administration system so that pension funds could both accept significant amounts of retirement funds from workers and manage and invest those funds in a transparent and safe structure. One of the asset classes in addition to government bonds, equities, and corporate bonds that was authorized for investment by pension funds was infrastructure debt securities. Until recently, few Nigerian infrastructure securities had strong enough credit ratings to be investable by cautious pension funds. Infrastructure Credit Guarantee Company (InfraCredit) hoped to break that logjam by supporting infrastructure issues denominated in local currency with credit assurances taking the place of sovereign guarantees. Other entities took different approaches to raising capital for infrastructure in this market. Africa Plus Partners (Africa Plus), for example, proposed a fund structure with features of American private equity. It was not yet clear if this type of fund arrangement would be as attractive as debt for pension fund investors. Could InfraCredit become a very large player? If the model was proven, could it be replicated in other nations? What would be the conditions precedent to make other nations attractive for an InfraCredit model?

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Supplements the (A) case.

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By early 2018, voice-controlled intelligent assistants had become a major new front in the battle between the giants of the technology sector. "Voice War" focuses on Alphabet’s strategy for Google Assistant, its entrant in the voice assistant space, and asks how the voice assistant should fit in with Alphabet's larger portfolio of products and services. While the mobile phone was the major platform for Google Assistant, Alphabet had recently introduced a range of smart home speakers to challenge first-mover Amazon’s Echo of devices, which were powered by its intelligent assistant, Alexa. Google also faced competition from Apple, whose intelligent assistant Siri had long been a staple of its mobile devices, but which introduced a smart home speaker in early 2018. Other competitors included Microsoft and Samsung, along with Chinese players Tencent, Alibaba, and Xiaomi.

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